Are you a parent thinking about handing down your business to your kids, but you’re not sure how to divide the earnings and the responsibility?Or are you about to inherit your family business but are unsure how it should be divided among your siblings who don’t work in the business as much as you do? These scenarios and more will be covered off in our chat with Jon Schindel – a man who’s been doing this for 13 years and has really seen it all when it comes to family negotiations.
Handing a family business down to the next generation is a notoriously difficult process… This week we thought we’d speak to an expert in succession planning to help give you the heads up if you ever find yourself in that situation.
What’s the most common problem you face in the first meeting you have with a family?
People don’t know what succession planning really is, and they are overwhelmed by the amount of possible options. The key here is to not worry too much about all of the potential different roads – it’s about sitting the family down as a group and finding some kind of common ground, and then finding the right frameworks and conventions to fit with that.
How do you broach giving up control of the business yourself?
First of all, you need to define exactly what YOU want out of the transition, i.e. a large payout that can see you through retirement, a retained interest in the business, a partial relinquishment of day-to-day work or a complete exit.
Then make an honest assessment of who in your family is capable of picking up the slack in your absence.
Then work out the boring stuff that can easily be defined in numbers, i.e. how quickly do you want to exit the business, and do you want to relinquish all shares or retain a stake?
How do you divide up the different shares and wages for the inheriting members of the family?
Frank discussions are required. The parents need to be clear from the outset with who gets what and why.
Practically, how can you give people different amounts of responsibility going forward?
A good way of doing this in succession planning is by creating different classes of share, i.e. “A-shares” that might carry the authority to manage day-to-day matters and “B-shares” that are non-voting shares. In theory you can create as many different share classes as you want, which gives you the freedom to define just how much say each member of the family can have over the future running of the business.
How do you find the dollar amount?
Think of it as if you were selling externally. Start off with a proper valuation and then value the shares from there. There are other things to consider when estate planning but a good rule of thumb is to start with a fair valuation.
Who drives the shareholder agreement?
It has to come from the parents, but it’s very important to make sure that the needs of the company are prioritized above anything else. Whatever the agreements may have been with the family, it has to be absolutely concrete that the company can afford to honor them.
What is normally the biggest challenge in succession planning?
The redistribution of responsibility is nearly always more awkward than the money. Honesty and transparency are so important to make this work.
What happens if the children don’t have enough money to buy out the parents?
Promissory notes are one option. But another option that is often overlooked is for the inheriting relatives to obtain a loan against the company. That way there can be a nice payout at the time of sale, and there are no potentially awkward situations in the future caused by members of the family owing each other money/shares etc.
What if there have already been fallouts among the family and it isn’t possible to gather everybody around the table?
It’s still possible to send documentation to each family member and advise them to have their own attorney look over it.
Why do so many passed-down businesses fail?
It’s normally because the parents haven’t handed the business over properly, rather than the errant behavior of family members. It’s vital that everything is done in an up-front, frank and professional way from the outset, otherwise the rest of the family will be doomed to fail from the start.
Wise words for the road:
[clickToTweet tweet=”“Most of the time the kids aren’t surprised what the transition plan is… no reason to be sly about it”” quote=”“Most of the time the kids aren’t surprised what the transition plan is… no reason to be sly about it””]
[clickToTweet tweet=”“Whatever happens has to be fair to the company first”” quote=”“Whatever happens has to be fair to the company first””]
How to contact Jon:
952 358 7406